Everybody knows China is manipulating its currency but nobody expected the U.S. to say so. And it didn't

Surprise, surprise. The U.S. Treasury Department criticized China for a“lack of flexibility” on currency exchange rates but didn't dare come out and say that the country is keeping the renminbi artificially cheap.

You don't get to say that, I guess, if you owe the Chinese as much money as the United States does.

China had allowed its currency to appreciate 20% against the dollar over the last four years.

But that appreciation stopped abruptly in the summer of 2008. Since April 2009, as the dollar dropped against just about every other currency in the world, the renminbi to dollar exchange rate has been stuck in a narrow range between 6.82 and 6.86 renminbi to the dollar.

To find a weaker currency against the dollar this year you have to look to Iceland's kroner or Iran's rial.

Neither the why or the how of China's currency manipulation are any secret.

In the global financial and economic crisis China's leaders have been afraid that a rising currency would price Chinese goods out of some markets and cut into already declining exports. That would, they worried, jeopardize any Chinese economic recovery.

To keep the renminbi from appreciating the People's Bank of China simply re-pegged the renminbi to the U.S. dollar in the summer of 2008. Before that, as a concession to its global trading partners, China had let its currency move against other currencies as long as the move didn't exceed a daily limit set by the bank. That had gradually let the renminbi gain about 20% on the dollar over three years.

Now even that very limited daily "float" is again off the table. That has indeed helped China's exports--at the expense of other Asian and European exporters who have seen their currencies--and therefore the price of their goods--climb against the dollar.

The Treasury Department's non-call--under a 1988 law the Treasury is required to report twice a year on whether any U.S. trading partner is manipulating its currency--isn't likely to make the problem of an intentionally undervalued renminbi go away. In fact the problem promises to get worse as world trade revives.

China's foreign-exchange reserves, the largest in the world, have started to surge again as a growing Chinese economy has attracted speculative capital and as exports start to ramp up. Reserves climbed by $141 billion to a record $2.273 trillion in the third quarter. That follows on a huge $178 billion increase in the second quarter.

This is exactly the kind of global imbalance that everybody agrees was one cause of the global financial crisis. Everybody agrees. But nobody is willing to do anything about it.

By the way, the last country to be named as a currency manipulator by the Treasury was China way back in 1994.